Kobe University Economic Review 50(2004) 43

COST-BENEFIT ANALYSIS REVISITED: IS IT A USEFUL

TOOL FOR SUSTAINABLE DEVELOPMENT?

By MAKIKO OMURA

This paper discusses the adequacy of applying cost-benefit analysis (CBA) to evaluate public
projects, given its limitation in evaluating non-economic values, its limitation in incorporating
distributional equity, including intertemporal equity, and its vulnerability to political influence. We
identify the first two problems as (1) valuation asymmetry arising from asymmetric measurability of
cost and benefit, and (2) time-span asymmetry arising from asymmetric time-span in which cost and
benefit accrue - problems that may be remedied through advancement in CBA techniques, such as
application of 'hyperbolic discounting,' 'sustainable preference' and 'sustainable CBA'. Through
reviewing such advancement in CBA techniques, we further explore the adequacy of CBA application
in environmental issues, with special attention to developing countries. Whilst many fundamental
problems are unresolved by the proposed technical sophistication, the use of CBA may prove useful by
taking a more pragmatic approach, subject to certain precautions.

1. Introduction

Cost-benefit analysis (CBA) is one of the methods and techniques used in decision-making
procedures, in particular, "the systematic estimate of all benefits and all costs of a
contemplated course of action in comparison with alternative courses of action" (Seneca et al.
1984, pp. 10). Those factors included in CBA are estimated in a common denominator of
'money' to enable the direct comparison of their magnitudes, where the costs are subtracted and
the benefits are added. The resulting net value, either positive or negative, directs the decision
of whether to take such a course of action. Indeed the application of such efficiency criterion is
considered to be fundamental for public decision-making, concerning public facility
investments, development projects, environmental regulations, etc., by illuminating the
advantages and disadvantages of the project and other possible alternatives, given the budget
constraint.1) According to the policy discussion paper by Arrow et al. (1997), examining the
role of CBA in environment, health, and safety regulations, CBA not only informs about the
allocation of scarce resources to be put to the greatest social good, but also about the amount of
optimal regulation, i.e., regulate until the incremental benefits are just offset by the incremental
costs, despite the inherent difficulty of measurement and the concern about fairness. The paper
essentially argues that CBA "should be required for all major regulatory decisions," provided
that there is no prohibitively high uncertainty, although by no means should they be bound by
strict CB rules when there are other significant non-aggregate- economic factors concerned

1) Pearce notes that it is a relatively recent phenomenon, except in the USA where the basic principle of CBA was
already applied to the Flood Control Act of 1936, that CBA has gained attention as a tool to achieve efficiency or
"value for money" in public programmes, with the growing size of public expenditure (1997, pp. 211).
44 MAKIKO OMURA

(ibid., pp. 199-201).

Such rational behaviour of comparing benefits and costs, fundamentally represented by
CBA, is actually done in our daily lives where individuals perform implicit or explicit CBA in
making decisions, i.e., whether it is 'worth' or not taking certain actions, although the
comparison involved would often be in non-monetary terms.2) Indeed economists would argue
that the calculation of benefit and cost is embedded in human 'homo economicus' nature. Yet
when it comes to making decisions at government level, CBA ought to be 'formal,' where all
relevant considerations are translated into clear monetary terms, through which a certain
objective or 'scientific' basis for judgement by the policy-makers is provided. Such a basis is
considered to provide a deterrent for the policy-makers to issue inefficient and/or politically-
biased measures by screening the alternatives in a transparent manner, although this view is
rebuffed by the opponents. Indeed the idea of incorporating environmental issues and
sustainability concerns into CBA probably stems from the past 'regrettable' experiences that
without such valuation, these issues are likely to be left out in policy-decision processes that
are based on CBA, resulting in higher risks of producing unsustainable programmes and
(unexpected) detrimental consequences. The tool is also considered to principally provide a
common language for dealing with the otherwise inaccessible, arcane issues to many people,
including the policy-makers, who are non-experts. For instance, environmental issues, where
the application of CBA is intended to alleviate or prevent various problems, are often
remarkably complex, embracing diverse fields such as biology, toxicology, engineering, law,
politics, economics, etc. (Heinzerling and Akcerman 2002).
Despite these advantages, there are abundant counter arguments disfavouring the application
of CBA, where often fundamental flaws and technical limitations are intricately intertwined.
They are represented by the problems of: (1) trying to evaluate what are often not 'evaluatable,'
i.e., non-economic values; (2) limited considerations regarding distributional equity (including
intertemporal equity); (3) political bias often present in the application of CBA. Given these
flaws, there are strong oppositions against any usage of CBA in public policy-making, whilst
there are scholars who are in favour of its application, proposing improvements that have lead
to some advancement in CBA measures in recent years.
Given these relatively recent advancements in the CBA techniques, this paper will examine
the prospect of its application in promoting or demoting sustainable development, especially
focusing on environmental issues. Following this introduction, we shall review the
aforementioned crucial issues of CBA, namely, (1) evaluation problems, (2) equity concerns
(discrimination against the poor and future generations), and (3) political concerns. We then
review some proposed amendment to CBA, derived from sustainability concerns, followed by
an exploration of political issues which cannot be separated from CBA despite its claim for
'neutrality.' In conclusion, we review various unresolved problems of CBA and some
proposition of remedies, with the question of the usefulness of CBA at the core .

2) It could reflect some intrinsic value, feeling of happiness, peacefulness of mind and so on.
 COST-BENEFIT ANALYSIS REVISITED: IS IT A USEFUL TOOL FOR SUSTAINABLE DEVELOPMENT? 45

2. Technical Issues: Evaluating the Incommensurable?

Over a decade, it has been argued that economic functions should treat environmental
aspects internally. There are numerous works on 'Green Accounting', proposed by those
economists who argue that the National Account System should include the cost of pollution,
amenity loss and so on.3) Yet given the difficulties of internalising externalities through
amending rules of market pricing, which necessarily involves the structural change of whole
capital market systems to some extent, some economists and environmentalists claim that such
environmental costs and benefits of externalities may be treated through CBA, so that public
policies can be guided accordingly. In Heinzerling and Akcerman's words, CBA "sets out to
do for government what the market does for business" (2002, pp. 7). Indeed, CBA is supposed
to include all cost and benefit aspects of the proposed programme, yet, it still entails a great
accounting problem as the lives of human beings, wild animals, plants, a whole ecosystem, and
many other non-marketed goods are incommensurable. None of the environmental economists
has succeeded in computing the environmental values.
As noted earlier, incommensurable choices are compared without explicitly 'quantifying' or
'measuring' them in the real world. People make choices through comparison of alternative
states of affairs, such that choices are judged by their relative values to one another by way of
'ranking,' rather than placing monetary values on alternative options. On the contrary, CBA, as
its name clearly indicates, does not seek to rank the alternatives but relies on monetary
valuation of the proposed plans, including those assets and services that cannot be essentially
monetised. Sandbach defines four stages involved in the operation of CBA:
1) identifying possible effects on the environment, costs, benefits, risks and
uncertainties; 2) attributing economic costs and benefits; 3) assessing the effect of time
and future uncertainties; 4) deciding upon the criteria for comparing projects - namely,
cost/benefit ratio, benefit minus cost, or the internal rate of return (1980, pp. 57).
In fact, despite some claims that it is possible to quantify all sorts of factors in monetary
terms, in practice, CBA tends to be associated with a rather narrow approach incorporating
only those elements that can easily be translated into monetary terms. This creates two kinds
of serious asymmetries in the accounting of cost and benefit: (1) valuation asymmetry arising
from asymmetric measurability of cost and benefit, and (2) time-span asymmetry arising from
asymmetric time spans in which cost and benefit accrue. In the case of pollution control
policy, estimation of costs of placing such devices, a major first step of CBA, might seem
relatively straightforward since it could be directly calculated from the 'known' status-quo
situation, e.g., an extra cost of installing air-cleaning devices or opportunity costs associated
with restriction on industrial output. In comparison, calculation of benefits achieved by the
regulation can be harder given higher 'unknown' factors - e.g., how much are the improved

3) Vincent, J.R. (ed.) (2000) provides various relatively recent works on the issue.
46 MAKIKO OMURA

environment such as cleaner air, better human health and revived ecosystems?4)
Moreover, market imperfections, a phenomenon widely seen in developing countries, may
degrade the whole benefit of conducting CBA by producing misleading results. A paper by
Hoogeveen and Oodstendrop (2003) examining the farm household investment behaviour in
natural resource conservation, shows that in the absence of credit markets, their investment
behaviour cannot be separated from consumption behaviour (the 'non-separation property' of a
household model) and that a "price-dependent discount rate" may reverse recommendations
made on the basis of a standard CBA.
The prohibitive costs and technical difficulties of the investigation and evaluation of certain
effects have rendered some economists engaged in CBA to view it as actually desirable to
ignore these effects. This essentially leads to the impossibility of attaining the claimed
advantage of 'neutrality' or 'objectivity' of CBA, as valuations would not only be non-separable
from technical constraints but also from normative beliefs and political issues (which will be
discussed in the later section).
With all its technical flaws, is there any reason to promote CBA for better environmental
protection? In Britain, environmental effects are often left out of CBA of public projects; e.g.,
new trunk roads are assessed using a combination of CBA and a 'separate' environmental
impact assessment (EIA). Whilst the CBA includes "the benefits of time savings, accident
saving and changes in vehicle operating costs," giving them monetary values through a variety
of statistical methods, the EIA assesses 13 different environmental effects such as "noise,
visual impact, air pollution, effects on agriculture and ecological impacts" without assigning
monetary values (Jacobs 1991, pp. 197). The final decision is said to be made by some
judgement on the 'relative weight' of the monetary conclusion reached by CBA in comparison
with the non-monetary indicators of EIA, although the latter is said to be given much less
importance in the decision-making process (ibid., Self 1975, pp. 45).
It is precisely for this reason that many environmental economists have argued that the
environmental effects of projects should be included within CBA by giving them monetary
values. They argue that the only way of properly protecting the environment is to express its
value in the same terms as other costs and benefits through the creation of artificial prices for
such benefits by investigating the 'willingness to pay' - what people would be willing to pay for
them. This could be done through direct opinion polls (contingent valuation method)5) or the
inference of such prices from observation of people's behaviour in other markets. The concept
of 'wage premium' for those workers who accept risky jobs in exchange for dangerous jobs

4) Clearly, this exemplifies both kinds of asymmetries where measurable costs are often born at present, although
highly unmeasurable benefits streams run much longer. Coupled with the usual 'discount' exercise, the cost benefit
analysis could produce biased results as discussed in the following section.
5) This is one of the popular methods which is essentially a form of opinion poll of those who will be affected on their
willingness to pay for public projects. It is called 'contingent' valuation, as people are asked to state their
willingness to pay, contingent on a specific hypothetical scenario and description of the proposed project benefits.
In the case of the environment, the economic values for various kinds of ecosystem and environmental services,
including their non-use-values, are estimated (see http://www.cbl.umces.edu/~dkingweb/contingent_valuation.htm,
for an overview).
 COST-BENEFIT ANALYSIS REVISITED: IS IT A USEFUL TOOL FOR SUSTAINABLE DEVELOPMENT? 47

indirectly reflects the valuation of their health risk.6) This technique is also claimed to reflect
how much people 'actually' value the environment, not the arbitrary level of concern of some
politicians or bureaucrats. However, their claim seems to be too simplistic as even 'willingness
to pay' cannot escape the informational problems each individual is facing. The most
important point perhaps is the equity concern arising from such an exercise where those people
with lower incomes may suffer from environmental deterioration as they cannot express a high
'willingness to pay' although their 'desire' to prevent such states may be at the same degree as
those of rich people (Jacobs 1991, pp. 197-198). This issue of equity cannot be separated from
valuation techniques, as we will discuss in the following section.

3. Discrimination Issues: Whose Voice Counts?

The most obvious objection to CBA as a way of decision-making is that it does not take into
account the interests of all people (to say nothing of other living beings) who will be affected
by the projects. Application of formal/informal CBA and 'willingness to pay' techniques which
rest on efficiency criterion will result in discrimination against people in inferior circumstances
now as well as in the future, as most environmental burdens will end up being imposed on
them - a theoretical pattern which "bears an uncomfortably close resemblance to reality"
(Heinzerling and Akcerman 2002, pp. 24).

3.1 Poor People

Being a monetary-based analysis, CBA does not take into account any moral issues, such as
distributional equity. People living in inferior circumstances (lower income, educational level,
social status) are unlikely to be able to express their preferences in monetary terms due to their
economic, political and technological constraints. Also, their preference will be given less
monetary values because of their low income levels compared to their rich counterparts.
Moreover, although rich countries may be able to reduce deforestation in Amazon by giving
financial support to those countries, poor countries have less options for forcing their interests
and influencing the decision-making of the former. The decision-making procedure trough
CBA rests on its Benthamian utilitarian foundation, that one dollar of benefit or cost is
assumed to have the same value to a rich person as to a poor one, and the decisions are based
on "the greatest net benefit of the greatest number," regardless of those who gain and who lose.
For global matters, such differences in income levels actually cause the export of "dirty
industries" from rich nations to poor nations because the costs of setting them up and the
resulting pollution in these developing countries are much less than in developed countries,
regardless of their intrinsic preference. The infamous internal memo by Lawrence Summers,

6) According to Heinzerling and Akcerman (2002), a common estimate in recent CBA of avoiding a risk of a death is
roughly US$6.3 million in 2000 in the USA, although estimates vary from as low as $1 million or less to $10
million or more. The original calculation of the US$6.3 million estimate comes from The Benefit and Costs of the
Clean Air Act, 1970 to 1990, Appendix I, by Environmental Protection Agency (1997).
48 MAKIKO OMURA

then the World Bank Chief Economist (who subsequently became US Secretary of the
Treasury, and now President of Harvard University), discusses three reasons to encourage the
migration of dirty industries to developing countries as the 'pollution heaven,' one of which is:7)
The measurements of the costs of health impairing pollution depend[] on the foregone
earnings from increased morbidity and mortality. From this point of view a given
amount of health impairing pollution should be done in the country with the lowest cost,
which will be the country with the lowest wages. I think the economic logic behind
dumping a load of toxic waste in the lowest wage country is impeccable and we should
face up to that.
The same phenomenon can be seen within the same country. Sandbach, for instance, cites
the example of two studies on the London airports at Heathrow and Gatwick, whose results
show that the depreciation in house value was four times greater for high-class properties than
for low-class properties, eventually representing the fact that only small values would be
attached to amenity losses in working-class neighbourhoods under CBA (op sit., pp. 60-61).
For the adjustment of such distributional equity issues, there are arguments that compensation
may be given to the losers from the gainers since a project is generally carried out if the gain to
the winners is greater than the loss to the losers. However, such compensation rarely happens
in reality.
There are other striking examples of CBA results, which indicate that the implementation of
the market value may be a very poor guide to policy. Heinzerling and Akcerman (op cit., pp.
29) state:
[T]he consulting group Arthur D. Little, in a study for the Czech Republic, concluded
that encouraging smoking among Czech citizens was beneficial to the government
because it caused citizens to die earlier and thus reduced government expenditures on
pensions, housing, and health care. In another study, analysts calculated the value of
children's lives saved by car seats, by estimating the amount of time required to fasten
the seats correctly and then assigning a value to the time based on the mothers' actual or
imputed hourly wage. These studies are not the work of some lunatic fringe; on the
contrary, they apply methodologies that are perfectly conventional within the cost-
benefit framework.

3.2 Future Generations

Like the case of poor people, the interests of future generations are necessarily discounted in
CBA with its methodological foundations of discounted utilitarianism - the best policy would
be the one that provides the greatest present discounted value of net benefits. Discounting the
future in CBA usually involves two stages, first of all, 'valuing the costs and benefits' of the
proposed project at a yearly basis, and then 'obtaining an aggregate present value of the project'
through discounting the future costs and benefits in order to make them commensurable with
present costs and benefits (Layard 1972, pp. 13). Because the costs spent on a public project

7) The memo is available at: http://www.whirledbank.org/ourwords/summers.html.

 COST-BENEFIT ANALYSIS REVISITED: IS IT A USEFUL TOOL FOR SUSTAINABLE DEVELOPMENT? 49

could be invested in other productive uses or just be put in a bank where interest is naturally
generated, those costs and benefits occurring in the future are discounted. Such applications of
discount rates, shrinking the future benefit streams, are criticised that they contribute to
environmental degradation since many environmental effects of a project occur over the long
term. There are two ways in which application of CBA may contribute to environmental
degradation through asymmetry in accounting: (1) by undercounting the future benefits of
environmental protection measures which tend to incur the cost at present whereas the benefits
extend into the long future and are not easily quantifiable (e.g., an afforestation or reforestation
project which would enhance an ecosystem, watershed functions, aesthetic values, etc.); (2) by
undercounting the future cost of negative environmental consequences of projects which
benefit the current generation at the expense of future generations by exhausting precious
resources, whose consequences can be irreversible. In either way, the positive environmental
values in the future are discounted.
Whilst discounting is essential and commonplace in comparing alternative financial
investments, there is no reason to assume its appropriateness in applying to environmental
issues. Indeed there are arguments that actual social and individual attitudes toward the future,
revealed by policy concerns and recent economic and psychological studies, are said to differ
from the disproportionate myopia of discounted utilitarianism (Heal 1997). Heal states that
such dominance of discounted utilitarianism is due to "lack of convincing alternatives than
because of the conviction that it inspires" (ibid., pp. 5). In the following section, we review the
hyperbolic discounting which is proposed as a more consistent method compared to the
conventional exponential discounting. We then review the recent works by Chichilnisky
(1996) and Heal (1997) in formulating an alternative approach to CBA, aimed at providing a
tool which is more consistent with sustainable development.

4. Some Advancement: An Approach to Sustainable Cost-Benefit Analysis

The problem of discounting in public projects does not arise from its underlying logic that
values occurring in the future are discounted because the same amount of money spent on a
public project could be invested in other productive uses or just put in a bank which naturally
generates interest. The problem arises due to the fundamental mismatch between financial
(economic) and environmental (scientific) time scales - whilst 50 years are inconsiderably long
to economists, they can be relatively short to ecologists, because financial and environmental
consequences unfold over different time spans. As a matter of fact, even if it is possible to give
environment a monetary value, it does not mean that the environment grows like a sum of
invested capital generating positive returns at a constant pace. There is also another problem of
'irreversibility' of environment with regards to changes in ecosystems, exploitation of
exhaustible resources, etc. Whilst there are opponents of CBA who argue that even zero
discount rates are not sufficient to protect the environment since CBA is still based on financial
50 MAKIKO OMURA

but not environmental criteria (e.g., Jacobs 1991, pp. 200), there are scholars who attempt to
amend the existing CBA so as to make it more sustainability-enhancing, i.e., sensitive to both
present and future, and more consistent with the actual individual preferences. A growing
body of empirical evidence suggests that the discount rate which people apply to future
projects is inversely proportional to the distance into the future, in particular, that discount
functions for utility are closely approximated by generalised hyperbolas, as opposed to the
standard exponential discount function applying a constant discount rate.8)
The hyperbolic discount function f(τ ) is expressed as (1+ατ )-γα where α,γ > 0 and thus f(τ )
is decreasing in τ . Whilst the discount rate is γ when τ = 0, events τ period away are
discounted with this factor which entails diminishing discount rates as the discounted event is
moved further away in the future, and vice versa, i.e., events closer to the present are
discounted at higher rates (Laibson 1996, pp. 7).9) Given a discount function, f(τ ), the
instantaneous discount rate at time τ is defined as the rate of decline in the discount factor at
horizon τ, where the rate falls as τ rises: r (τ )= -f'(τ )/ f (τ ) = γ /(1+ατ ). Thus, a discount
factor δ (τ ) at horizon τ, with the continuously compounded discount rate is:

1
δ (τ )≡lim ―― (
∆→0 1+r (τ ) )1/∆
= exp-r (τ ) = exp-γ / (1+ατ)

Contrasting this with the customary exponential discount function which is: f (τ ) =exp-ρτ,
which can also be written as f (τ ) =δτ where the discount factor δ ≡exp-ρ. The discount rate r
(τ ) =-f '(τ )/ f (τ )=ρ =-lnδ and the discount factor δ are both constant and do not depend on
the time horizon τ. The difference in the calculated present values of US$1million in the time
span of 50 years are depicted in Figure.1, where two discount factors for exponent functions
are set as δ = 0.95, 0.93, reflecting the standard discount rates at the range of 5~7% applied in
most public projects.10) For hyperbolic function, an arbitrary value is used, where γ =1 (initial
discount rate = 1 at τ = 0) and α = 3. Naturally, as α increases, the present value increases, and
likewise, as γ decreases, the present value increases.
As a matter of fact, as pointed out by many scholars, the inherent problem of the standard
utilitarian discounting is that under any positive discount rate, the long-run future is deemed
irrelevant. Figure 2, where an additional 1% constant discount rate is added, depicts this point
where even a very low discount rate of 1% renders US$1million into a mere US$50,000 in 300
years. Needless to say, the more standard discount rates of 5% and 7% make the value
negligible after much shorter periods. The hyperbolic discount functions clearly exhibit a path
that is more consistent with the notion of an 'intertemporal or intergenerational equity.'

8) Some of this evidence is based on statistical studies of individual decisions, such as savings decisions and choices in
financial markets (e.g., Lowenstein and Thaler 1989), as well as the valuation of public projects intended to bring
present and future benefits (e.g., Cropper et al. 1994).
9) See Loewensten and Prelect (1992) for an axiomatic derivation of this discount function, and Ainslie (1992) for a
survey.
10) These are the typical discount rates applied for public sector projects in the USA, the Netherlands, Denmark, the
UK, etc., although there are cases where lower 'special' discount rates are applied, such as 3% for forestry projects
in Britain.
 COST-BENEFIT ANALYSIS REVISITED: IS IT A USEFUL TOOL FOR SUSTAINABLE DEVELOPMENT? 51

with γ=1, α=3, τ={0,50}, and δ=0.95 and 0.93 (exponential)

US$1,000,000
US$900,000
US$1million at Present Value

US$800,000
US$700,000
US$600,000 Hyperbolic
US$500,000 Exponential (r=0.05)
US$400,000 Exponential (r=0.07)
US$300,000
US$200,000
US$100,000
USS0
0 10 20 30 40 50
Time Horizon (τ years)

FIGURE 1. HYPERBOLIC AND EXPONENTIAL DISCOUNTED VALUES

with γ=1, α=3 and α=5, τ={0,300}, and δ=0.99, 0.95, 0.93 (exponential)
US$1,000,000
US$900,000
Hyperbolic (a=3)
US$800,000
US$700,000 Hyperbolic (a=5)
present value

US$600,000
US$500,000 Exponential (r=0.01)

US$400,000
Exponential (r=0.05)
US$300,000
US$200,000 Exponential (r=0.07)
US$100,000
US$0
0 50 100 150 200 250 300
Years

FIGURE 2. HYPERBOLIC AND EXPONENTIAL DISCOUNTED VALUES

52 MAKIKO OMURA

On the theoretical side, such an idea is captured by the welfare criterion characterised by
"sustainable preferences" proposed by Chichilnisky (1996), which is sensitive to the welfare of
all generations and does not assign a "dictatorial role" to either the present or the future.11) The
idea behind is to assign weights which decline into the future to any finite number of
generations, and then assign some extra weights to the last generation, then extend this
procedure to infinitely many generations.12) Such formulation is proposed as a mixture of the
pro-present standard discounted utilitarian approach and the pro-future green golden rule or
maximum sustainable utility level, which neglects the welfare of any finite number of
generations regardless. Accordingly, the optimal paths under sustainable preferences would
diverge from the ones under maximised present discounted value operations. Chichilnisky
claims that independent sustainable preferences can define shadow prices for "sustainable
optima," which can be used for project evaluation and for the characterisation of optimal
solutions.
Utilising her criterion, Heal (1997) proposes a new "sustainable cost-benefit analysis"
through two key steps to make CBA more consistent with sustainability concept: (1) valuing
the future more appropriately by placing more weight on it (à la Chichilnisky); (2)
incorporating the value of environmental assets, in particular the services provided by stocks of
environmental assets. The second idea is represented by incorporating the notion of natural or
ecological capital as a source of value to society, i.e., source of wealth and of "sustainable
income" or "sustainable net-benefit." The new formulation can be compared by the classical
Hotelling case and its extension where the resource stock is incorporated, all in a form of utility
function where society's instantaneous utility at each point in time is expressed as a function
u(cτ , sτ), where cτ represents a flow and sτ an environmental stock at date τ (ibid., pp. 13-15):
(1) The classical Hotelling case applying the utilitarian discounting, where the source of utility
∞ ∞
depends only on the rate of resource use:∫0 u(cτ)e-δτ dτ, subject to:∫0 cτdτ ≤ s0.
(2) The case applying the utilitarian discounting, where the source of utility depends on the use
∞ ∞
flow and the stock of the resource:∫0 u(cτ, sτ)e-δτ dτ, subject to:∫0 cτdτ ≤ s0.
(3) The case applying Chichilnisky's sustainable criterion, where the source of utility depends
∞
on the use flow and the stock of the resource:θ∫0 u(cτ, sτ)e-δτ dτ+(1-θ )lτ→ im∞u(cτ, sτ) subject
∞
to:∫0 cτdτ ≤ s0, where θ ∈[0,1] is an arbitrary positive weight reflecting the degree of

11) Her view of "sustainable preference" requires that there is a combined social or representative preference where all
generations, each with its own preference of an intertemporal society, are represented in a reasonable way.
Through her axiomatic approach toward "sustainable preference," various welfare criteria are disproved, namely:
(a) the standard, sum of discounted utilities, for any discount factor; (b) Ramsey's criterion; (c) the overtaking
criterion; (d) lim-infinimum; (e) long run averages; (f) Rawlsian rules; (g) satisfaction of basic needs. Whilst (a)
discriminates against future generations, (b) and (c) exhibit incomplete order, thus are deficient in comparing
reasonable alternatives, (d) and (e) discriminate against present generations, and (f) and (g) take into consideration
only the welfare of the neediest. The construction of sustainable preference is similar to aggregating (a) and (e) of
the whole utility stream, and naturally, discounted utility maximisation and sustainability lead to different value
systems.
12) Formally, sustainable preference W :r∞→R (:r∞ the space of all infinite bounded sequences of real numbers) is
given as:
∞ ∞
W(α) = Σ λτ ατ +φ (α) where for, ∀τ, λτ >0, Σ τ=1 λτ<∞, and φ (α)=limτ (ατ)extended to all of r∞, where τ denotes
τ=1
an integer representing each generation.
 COST-BENEFIT ANALYSIS REVISITED: IS IT A USEFUL TOOL FOR SUSTAINABLE DEVELOPMENT? 53

present/future orientation.
The new formulation (3) will lead to increases in shadow prices of the long-lived
environmental assets since the shadow prices may partly reflect future contributions that are
not discounted. Higher shadow prices will in turn induce people to limit their use and to
preserve them. Heal suggests that such a calculation makes a "fundamental difference to the
economic analysis of issues such as global warming, habitat fragmentation and ecosystem
preservation, and indicating higher returns than hitherto reported on investments in
conservation of critical ecosystems" (ibid., pp. 4). As a matter of fact, Heal attempts to
overcome the two types of asymmetry we have earlier presented, the valuation asymmetry and
the time-span asymmetry.
Despite these sophisticated advancements in 'framework,' it still remains a practical question
in determining what figures to put into the arbitrary constants and variables in the discount
function, or what weight θ to put in the new formulation à la Chichilnisky and Heal, so that
there is a "reasonable representation" of all generations. Heal (1997) states the necessity of
understanding how the shadow prices of consumption, investment and resources relate to each
other, to the discount rate and to the time, through a study of optimal development paths, so
that we know "what sustainability means for project evaluation," i.e., we can evaluate projects
based on the sustainability criteria (pp.12). Accordingly, we can deduce a set of rules to be
applied in sustainable CBA. Yet the fundamental question is posed by Chichilnisky (op cit.,
pp. 250) herself: "[W]hose welfare do sustainable preferences represent?", and yet another
issue remains that preferences may not be stable for any generation. Pearce notes that despite
considerable efforts to incorporate distributional weights (not necessarily intertemporal) into
CBA, which is one of the major concerns here, such incorporation is rarely used in project
appraisal, partly due to the difficulty in seeing the "scientific basis for equity weight" (1997,
pp. 212). He in fact even casts doubt on the ability and appropriateness of CBA to handle
equity issues altogether (ibid.).
Whilst such a framework may allow us to study the implications of different choices of these
variables, the relationships between these shadow prices and their paths over time, in order to
evaluate projects based on the sustainability criteria, the practicality of the application of such a
framework may pose a big concern due to its perceived costliness in collecting relevant
information. Indeed, what is completely missing here is the point that a CBA exercise is not
costless, rather, it tends to be resource- and time-intensive, and it is worth undertaking only
when the expected benefit of doing so outweighs the cost, i.e., that the decision coming out of
CBA must be better than the one without CBA. 13) Such costs would be particularly
burdensome to poor countries with non-trivial resource, skill, and personnel constraints. At the
end of the day, public projects involving environmental issues may be said to be primarily
political issues of prioritising resource allocation in reality.

13) This point is also stressed by Davies (1997) and Heinzerling and Akcerman (2002).
54 MAKIKO OMURA

5. Political Issues

For whatever kind of environmental impacts, such as land use and habitats, pollution and
health, resource consumption, visual recreational and other forms of amenity, decisions are
influenced by interplay of political forces, almost without an exception. For example, if the
'roads lobby' has more power than the 'nature conservation lobby,' then the road is likely to get
built. If the governments are linked to the nuclear industry, nuclear plants may well be
constructed however strong are the economic and environmental arguments against them.
Pollution levels are unlikely to be set independent of whatever polluting industry claims it can
achieve. The economists claim that CBA enables a more rational and objective way of making
such decisions, that "instead of politicians or experts simply indicating what is good for people,
account can be taken of the expressed interests and preferences of all those affected by the
decision" (Jacobs 1991, pp. 196).
However, such 'claimed rationality' or 'objectivity' of a CBA is much dependent upon the
techniques/methods used in the analysis, which are generally based on the value judgement of
those who are interested in carrying out the projects, and thus are likely to give a lesser weight
to environmental disbenefit which could be disregarded as 'intangibles.' As mentioned by
Davies, CBA may lend a "pseudo-scientific authority " to government to rationalize and pursue
its own agenda regardless of its moral responsibility (1997, pp. 209). It is not infrequent,
especially in developing countries, to grant little importance to environmental effects because
government decision-makers are much more concerned with economic growth and are more
impressed by a project with high financial returns, despite its major environmental costs, than
by one with significant environmental benefits and a smaller return.
Whatever techniques used in CBA, the ultimate decision-making is always a political issue
since CBA cannot escape informational constraints and uncertainty, under which policy-
makers routinely make decisions. Pearce notes that "the whole process of policy priority
setting is all too often ad hoc, reactive, crisis-based and over-responsive to often ill-informed
pressure groups (of all kinds)" (op cit., pp. 210). As Ray indicates, it would indeed be futile to
expend much resources and efforts in conducting CBA, "only for this work to be nullified by
some arbitrary, if not capricious, amendments of the final results" (1997, pp. 217).

6. Conclusions

6.1 The Unresolved CBA Problems

As this paper has been considering, CBA has a number of problems such as evaluating
incommensurable goods including various environmental assets and services, discriminating
against people in inferior circumstances and of future generations, failing to achieve the
claimed political neutrality, etc. Despite the development of valuation techniques such as
contingent valuation, and of frameworks by Chichilnisky and Heal in alleviating some serious
 COST-BENEFIT ANALYSIS REVISITED: IS IT A USEFUL TOOL FOR SUSTAINABLE DEVELOPMENT? 55

flaws of current CBA mechanics, the inherent problems of evaluation asymmetry and time-
span asymmetry still abound - CBA still suffers from serious defects in practical
implementation given the difficulty of quantifying various types of environmental costs and
benefits, to say nothing of present and intergenerational equity matters. Even with
sophisticated shadow pricing, market imperfection so prevalent in developing countries,
especially in credit, labour and property markets, would likely make CBA produce misleading
results. It is indeed a great tragedy of CBA that in its attempts to incorporate sustainability
concerns due to the lack of political attention to it otherwise, it suffers from its own flaws in
the most significant manner.
Also in reality, the outcome of CBA and the choice of techniques would be quite dependent
on the predetermined goals that would be politically driven. Even if the claimed objectivity is
achieved, whether 'science' enlightens or blinds the decision-makers is very much context
dependent - how knowledgeable the decision-makers are, and perhaps more importantly, how
neutral, favourable or disfavourable the decision-makers are with regards to the outcomes of
CBA. More fundamentally, poor countries facing serious money and personnel constraints
would be unlikely to conduct CBA which tend to be costly, particularly for environmental
issues where informational constraints and uncertainty are non-trivial with irreversible factors
and intricate impacts. Also as noted by Ray, the application of 'lower' discount rate, or
'hyperbolic discount rate' for that matter, may not be realistic especially for those developing
countries financing their projects on loans which incur constant real interest rates (which have
rarely been below 3 or 4 %) (ibid.). These problems are perhaps reflected in the fact that there
are still many disputes over the application of CBA, and in the fact that its use has been
relatively infrequent until recently (except in the USA), despite its three decades of history
since the early textbooks and manuals were produced by Little and Mirrlees (1969, 1974),
Mishan (1971), Dasgupta et al. (1972) and Pearce (1972).
It is indeed tragic that whilst CBA attempts to overcome subjective judgement, political bias
and inefficient public policy implementation, it is never free of political influence; whilst CBA
is recommended because the market fails to reveal appropriate values for environment and
other goods, the very market failure makes it difficult to determine the costs and benefits of
those goods to be reflected in CBA; whilst CBA may have a more significant efficiency impact
on developing countries with limited resources, such countries are less likely to implement
CBA precisely because of their resource constraints.
Clearly, CBA alone is not sufficient for decision-making. Yet can it help us to escape from
our own myopia in promotion of more sustainable development?

6.2 Some Remedies: A Pragmatic Approach

There are conflicting views regarding the superiority of economic (quantitative) orientation
compared to political (qualitative) orientation in directing public policy-making. Yet despite
all its flaws, it would be unlikely that CBA will completely lose its role in public policy-
making. Its significance in the context of developing countries is stressed by Pearce (1977)
56 MAKIKO OMURA

that, in spite of the difficulties of implementing CBA in those countries due to its difficuties in
monetary valuation with prevalent market imperfections and lack of capacity to execute
sophisticated project appraisals, CBA is more important for them since they cannot afford
inefficient management of public expenditures like the rich counterparts. There is still strong
support for the use of CBA maintaining that it is only through 'monetary' valuation that one can
'prove' the value of environment or sustainable projects (e.g., Pearce 1997, pp. 212). Such a
view probably comes from the strong reliance on 'figures' by policy-makers. As resented by
Heinzerling and Akcerman, "[e]ven when the data gaps are supposedly acknowledged, public
discussion tends to focus on the misleading numeric values produced by cost-benefit analysis
while relevant but non-monetized factors are simply ignored" (op cit., pp. 2).
So how shall we overcome the existing problems of CBA?
Heinzerling and Akcerman (2002) maintain that CBA should not be used to set the ends of
policy, but it may be used to set the most cost-effective means of implementing the
predetermined policy. Their strong opposition stems from its intrinsic conflict with the
principles of fairness in that the usage of CBA would aggravate the existing patterns of
inequality by rationalising and reinforcing them. Given also the large costs often involved in
CBA, they argue for the use of other alternatives that are produced through 'political process,'
such as 'technology-based regulation' which does not require precise quantification of costs and
benefits, 'incentive-based pollution trading' which achieves an efficient allocation of permits
through trading with a fixed supply of permits set by law, 'incentive-based informational
regulation' which requires public disclosures about environmental and other risks (pp.31).
Likewise, Jacobs (1991) also considers an option of setting a 'minimum environmental level'
which every project must a priori meet any monetary valuation. He claims that in this fashion,
the minimum interests of directly and indirectly affected people are protected before current
decision-makers' preferences are valued. Discussing the practicality and effectiveness of these
proposed alternatives is beyond the scope of this paper, yet such regulatory measures could be
effective only where public institutions are sound, with the ability to enforce and monitor the
compliance. Also the question regarding how to set the optimal regulatory level, facing the
same information constraint, is unanswered. In fact, it seems to be the matter of choice of
trading-off between the severity of policy failure (government failure) in the absence of CBA
and that of evaluation/distributional failure (market failure) inherent in CBA.
After all, whatever amendments made for CBA, the ultimate decision on a project is
political, not simply computational. Public planning decisions have to consider, to some
extent, previous plans and policies that have achieved social and political acceptability,
although CBA does not put weight on such previous plans. According to Self, "planning
ideally attempts a synthesis of elements through imaginative construction while CBA ideally
factorises elements into their smallest components, measures, and makes a computation" (op
cit., pp. 167). Any planning should take into account empirical factual data of diverse kinds,
and should not solely rely on the results of CBA which tend to seek only easily countable data
in order to convert them into economic equations. Indeed the limitations of CBA, that it
 COST-BENEFIT ANALYSIS REVISITED: IS IT A USEFUL TOOL FOR SUSTAINABLE DEVELOPMENT? 57

cannot be completely carried out due to existing resources, time, information, technological
and/or other constraints, and the 'implications' of it should be well informed and well
understood ideally by all those concerned. Also, given widespread market failures, CBA
results ought to be considered in a wider context, together with other qualitative analysis, since
the predictions based on CBA can be widely misleading.
The significant advantage of CBA is that it represents a very simple and rational idea that
decisions are based on some weighing up of the costs and benefits of an action. Provided that
CBA is not unjustifiably costly or biased, CBA may be useful in giving some guidance and
providing some 'objectivity' to political judgement. Indeed many criticised problems of CBA
are not necessarily unique to it, i.e., any decision is biased to some extent, and there is no
guarantee that other measures, or for that matter, political decisions, will better incorporate the
equity concerns, etc. Although the use of CBA inevitably involves some political bias, it still
might reduce such bias more than if no such measure is taken.
The past experiences tell us that a uniform rejection of CBA may be unwise given its
usefulness in informing the decision-makers to make policies in a possibly more efficient and
even sustainable manner. Whilst it is the responsibility of the economists and other scholars to
advance the research in this area and to establish reasonable criteria, there will always remain
some aspects of uncertainty given our limited knowledge. Indeed while policy-makers may
choose a policy which they wish to pursue irrespective of CBA results in some circumstances,
the best service we could offer would be to provide different scenarios using different methods
and also to provide clear information on the background and conditionalities of such scenarios,
i.e., provide as much objective information as possible, so that policy-makers, hopefully using
their best knowledge, sense and skills, are equipped with the best informational set to make the
best possible decisions.

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